Question 1

The cash change equation for preparing the statement of cash flows using a T-account work sheet is: Assets = Liabilities + Shareholders' Equity

Accepted Answer

The statement is incorrect. The cash change equation for preparing the statement of cash flows using a T-account work sheet is: Beginning Cash Balance + Cash Inflows - Cash Outflows = Ending Cash Balance.

Question 2

During the maturity phase, cash outflow typically exceeds cash inflow from operations because operations are not earning profits while the firm must invest in accounts receivable and inventories.

Accepted Answer

During the maturity phase, a firm typically experiences stable cash inflow from operations that exceed cash outflows, as operations are efficient and profitable, reducing the need for significant investment in accounts receivable and inventories.

Question 3

Revenues from sales of goods or services to customers during a period equal cash received from customers during that period.

Accepted Answer

Revenues from sales of goods or services are recognized when earned, not necessarily when cash is received, due to the accrual basis of accounting. Cash received may occur at a different time.

Question 4

Some investing and financing transactions do not involve cash but appear on the statement of cash flows.

Accepted Answer

Investing and financing transactions that do not involve cash are not reported on the statement of cash flows; instead, they are usually disclosed in the footnotes to the financial statements.

Question 5

The cash flow from operations section shows an addition for the increase in the current asset accounts in an amount equal to the firm's expenditure to acquire a derivative.

Accepted Answer

The cash flow from operations section only includes changes in current asset accounts that directly affect cash flow, such as accounts receivable and inventory. Expenditures to acquire a derivative would be reported in the financing or investing sections of the cash flow statement.

Question 6

The first step in a procedure for preparing the statement of cash flows using a T-account work sheet is to explain the change in the master Cash account between the beginning and the end of the period by accounting for the changes in the other balance sheet accounts.

Accepted Answer

The answer of The first step in a procedure for...

Question 7

The conversion of nonparticipating preferred stock into common stock should be presented in a statement of cash flows as a(n)
A)operating activity.
B)investing activity.
C)financing activity.
D)noncash exchange.
E)None of these answers is correct.

Accepted Answer

The conversion of nonparticipating preferred stock into common stock is considered a noncash exchange and should be disclosed in the statement of cash flows in a separate section for noncash investing and financing activities, rather than as an operating, investing, or financing activity.

Question 8

Net income for a particular period will likely differ from cash flow from operations for the same period.

Accepted Answer

Net income is determined based on accounting principles and includes non-cash items such as depreciation and amortization, while cash flow from operations only reflects the actual cash inflows and outflows from business operations. Therefore, the two figures are not necessarily the same.

Question 9

Which of the following independent transactions would cause net income to be more than cash from operating activities?
A)A decrease in the accounts receivable account
B)An increase in the merchandise inventory account
C)An increase in the accounts payable account
D)An increase in the accrued wages payable account
E)None of these answer choices is correct.

Accepted Answer

An increase in the merchandise inventory account indicates that the company has purchased more goods to sell or produce, which will increase the cost of goods sold and lower the net income. However, it does not affect the cash from operating activities as it is a non-cash transaction. The other options (A, C, and D) all involve changes in accounts that affect the cash balance and net income in opposite directions, so they cannot cause net income to be more than cash from operating activities.

Question 10

Firms typically report cash flows from operations using the direct method.

Accepted Answer

Most firms report cash flows from operations using the indirect method, which starts with net income and adjusts for non-cash transactions and changes in working capital.

Question 11

Weakening profitability,from reduced sales or reduced profit margins on existing sales, signals the beginning of the decline phase, but ever-declining accounts receivable and inventories can produce positive cash flow from operations.

Accepted Answer

Even though profitability may weaken during the decline phase, decreasing accounts receivable and inventories can lead to positive cash flow from operations as the company collects on outstanding debts and reduces its inventory levels.

Question 12

Which of the following would be reported in the operating, investing, or financing sections of the statement of cash flows prepared under the indirect method?
A)Declaration of an unpaid cash dividend
B)Acquisition of a factory warehouse by issuing long-term debt
C)Gain on the sale of cash equivalents
D)Write-off of an uncollectible account receivable
E)None of these answers is correct.

Accepted Answer

The answer of Which of the following would be reported...

Question 13

The growth phase portrays cash flow characteristics similar to the introduction phase.

Accepted Answer

The growth phase is characterized by increasing sales and profits, which leads to positive cash flow. The introduction phase is also characterized by positive cash flow, as the company is able to generate enough revenue to cover its costs.

Question 14

The product life-cycle concept from microeconomics and marketing provides useful insights into the relations among cash flows from operating, investing, and financing activities.

Accepted Answer

The product life-cycle concept is a useful tool for understanding the stages of a product from its introduction, growth, maturity, and decline. It can help businesses make decisions about their investment, marketing, and production strategies. In terms of cash flows, the concept can provide insights into the changing cash flow patterns of a product over time, which can affect the decisions made around operating, investing, and financing activities. Therefore, the statement that the product life-cycle concept provides useful insights into the relations among cash flows from operating, investing, and financing activities is true.

Question 15

The last step in the accounting record-keeping process is preparing the statement of cash flows from balance sheet amounts and from details of transactions affecting the cash account.

Accepted Answer

The statement of cash flows is the last financial statement prepared in the accounting record-keeping process, and it is prepared using information from the balance sheet and details of cash transactions. This statement summarizes the inflows and outflows of cash during a specific period, and it provides important information about how an organization's cash balances have changed over time.

Question 16

When using the indirect method to calculate cash flow from operations, add back the subtraction for minority interest in earnings of consolidated, but less than 100%-owned subsidiaries to derive cash flow from operations.

Accepted Answer

Under the indirect method of calculating cash flow from operations, the subtraction for minority interest in earnings of consolidated, but less than 100%-owned subsidiaries is added back to the net income to derive cash flow from operations. This is because minority interest represents a portion of the subsidiary's earnings that the parent company does not own, and therefore should not be included in the calculation of the parent company's cash flow from operations.

Question 17

The proper interpretation of information in the statement of cash flows requires an understanding of the economic characteristics of the industries in which a firm conducts operations and a multi-period view.

Accepted Answer

The statement is true as understanding the economic characteristics of industries and taking a multi-period view help in proper interpretation of information in the statement of cash flows.

Question 18

Choose the combination below that best reflects the appropriate classification of cash received from investing and financing activities. Cash Received from Cash Received from
Investing Activities Financing Activities
A)Sale of treasury stock Proceeds from issuing common stock
B)Sale of treasury stock Sale of investment securities
C)Sale of investment securities Proceeds of issuing common stock
D)Proceeds from issuing common stock Sale of investment securities
E)None of these answers is correct.

Accepted Answer

The sale of investment securities is classified as an investing activity because it involves the sale of long-term assets. Proceeds from issuing common stock are classified as a financing activity because it involves obtaining funds from owners.

Question 19

Most, but not all, firms report cash flows from operations using the indirect method.

Accepted Answer

Most firms do use the indirect method to report cash flows from operations, but some may choose to use the direct method.

Question 20

Cash flow from ____ activities includes purchases and sales of marketable securities, investments in securities, property, plant, and equipment, and intangibles.
A)operating
B)investing
C)financing
D)purchasing
E)exchanging

Accepted Answer

Cash flow from investing activities includes purchases and sales of marketable securities, investments in securities, property, plant, and equipment, and intangibles.

Quiz 16: Statement of Cash Flows: Another Look